Utilities Weigh Price of Power with Aging Plants and Renewable Mandates

Denver  (The Denver Post) — You wake up one Saturday morning and decide you're going to buy some new kilowatts of electricity, so you head down to the energy store to look under the hood and kick the tires.

But the one thing that you can't easily check on the coalmobile or the wind cruiser is the sticker price — how much the energy costs. How do you know what to buy and what the impact will be on monthly bills?

It is a question utilities have to ask as they replace aging power plants and face mandates to add renewable energy. Colorado, for example, will require that 30 percent of all generation for investor-owned utilities comes from renewable sources by 2020.

"It is a challenge, because you have customers who just want the lowest cost and customers who want the most renewable energy," said David Eves, chief executive of Xcel Energy's Colorado subsidiary.

"Some day utilities are going to figure out a way to let their customers choose," Eves said.

To get a handle on the costs, government agencies, utilities, energy consultants and engineering firms use a technique called "levelized cost of energy."

The analysis takes all the costs of building and operating a plant over its lifetime and divides those dollars by the energy the plant produces to give a dollars per megawatt-hour.

A megawatt is a thousand kilowatts, and the average Colorado family uses about 625 kilowatt-hours a month, according to Xcel.

Levelized cost analyses, however, rely on assumptions that can make the estimates lower or higher: How much will natural gas cost in 2020? How strong is the wind? Will energy tax breaks be available?

The Denver Post reviewed four levelized cost studies — from government agencies, financial firms and engineering companies — and found estimates could vary as much as 100 percent.

"It is a starting point for people to argue," said Paul Komor, associate director of the Renewable Energy and Sustainability Center at the University of Colorado at Boulder.

"In the end, it isn't only about costs," Komor said. "It is about what kind of energy policy you want to have."

So, let's take a tour of the showroom and see what the cost of energy looks like — when looking for brand-new plants and generation.

The coalmobile

Standard coal-fired power plants are among the least expensive forms of electricity generation.

The cost among the studies ranged from a low of 7.4 cents to 13.5 cents per kilowatt-hour. Black & Veatch, the Overland Park, Kan., engineering company, places the range from 8.6 to 11.5 cents. The U.S. Energy Information Agency's estimate of 9.5 cents was in the middle.

Coal and natural gas benefit from being standard technologies, making those plants easier to build, said Ivin Rhyne, manager of the electricity analysis office at the California Energy Commission.

"Traditional technologies are more mature and tend to have lower costs," he said. "But levelized cost analysis doesn't capture external costs that might be considered important."

A 2009 study by the National Research Council titled "The Hidden Costs of Energy" estimated that the pollution impacts of coal — the most polluting of the fossil fuels — added 3.2 cents a kilowatt-hour in 2005, declining to 1.7 cents a kilowatt-hour in 2030 as more electricity comes from cleaner coal plants.

And that doesn't count the possibility that a cost for carbon emissions released from burning fossil fuels and linked to climate change will be imposed to cut the pollutant.

In Colorado, Xcel Energy coal generation, from a fleet of plants that include many older units, costs 2 cents to 2.5 cents a kilowatt-hour, according to the company.

That would nearly double if a pollution program adding $20 per ton of carbon was added — since burning coal to generate one megawatt-hour emits 1 ton of carbon dioxide, said Kurt Haeger, the company's managing director for resource planning.

And while coal prices are less volatile than natural-gas prices, since July 2009 the price of Wyoming's Powder River Basin coal has risen 66 percent to $14.55 a ton on the spot market, according to the EIA.

The natural-gas coupe

The least-expensive fossil fuel generation in the major cost studies is natural gas.

The EIA put the average cost at 6.6 cents a kilowatt-hour in 2016 for a conventional combined-cycle gas plant. A study by financial adviser Lazard Ltd. put the cost at 6.9 cents. Black & Veatch estimated the cost as high as 10.9 cents.

Natural gas burns cleaner than coal, and the National Research Council study estimated the average pollution cost at 0.43 cents a kilowatt-hour.

The biggest concern with natural gas has been the cost of fuel.

In the past 10 years, the spot price has been as low as $1.80 per million British thermal units on the New York Mercantile Exchange and as high as $15.38. The average for the decade was $6.07.

The closing price on Thursday was $3.89.

In Colorado, the cost of natural gas, like coal, is passed directly to consumers, so monthly bills rise and fall with the price.

So the price of fuel makes a big difference in the levelized cost studies. In studies such as Lazard's and the California Energy Commission's, more than half the levelized cost for natural-gas generation is fuel costs.

"Natural-gas plants are cheaper to build, but potentially more expensive to run," said Chris Namovicz, an EIA analyst.

The wind cruiser

The cheapest renewable-energy source, and one of the least expensive overall, is wind power, with the average cost between 4.4 cents and 11.5 cents a kilowatt-hour.

The better the wind resource, the lower the cost.

The EIA calculates, based on 2009 costs, that a wind farm built in the best wind areas will generate electricity for 8.2 cents a kilowatt-hour, while in a poorer wind area it will cost 11.5 cents.

Xcel is paying 4.2 cents a kilowatt-hour for wind, but that will rise due to cost escalators aimed at adjusting for inflation, which is tied into the long-term contracts the utility has with wind farms, Haeger said.

The drawbacks are that the wind doesn't always blow and it blows most often at night, when there isn't a big demand for electricity.

The problem with wind — as with solar — is what is called the "capacity factor." A coal or natural-gas plant will run 70 to 90 percent of the time, constantly generating electricity.

A wind farm runs 32 to 42 percent of the time and a solar array generates electricity 22 to 27 percent of the time.

So even though wind kilowatt-hours can be cheap, they can't provide all the electricity.

"There are engineering challenges," said Rob Patrylak, a Black & Veatch managing director. "There is a question of how much wind you can put on a system."

The solar sedan

Solar energy is the most expensive way to make power — more than twice as expensive as natural gas and wind, the five levelized cost studies say.

The EIA estimates the cost of a utility-scale solar photovoltaic installation at 19 cents a kilowatt-hour. Black & Veatch puts the range at 14.1 to 18.9 cents a kilowatt-hour for 2010 construction.

The EIA puts the cost as high as 21 cents for a new plant going into operation in 2016.

The cost of solar cells, however, has dropped by more than a quarter since 2001 and is projected to continue to decline. That could bring the levelized cost for photovoltaics to 8 or 9 cents a kilowatt-hour by 2020, according to a study by Greentech Media, a renewable-energy marketing and research firm.

The cost of the cells makes up 50 to 60 percent of the total installed cost of a solar energy system, according to Lazard.

Xcel has paid almost 22 cents a kilowatt-hour for utility- scale solar installations, but the company projects that cost now dropping to 14.5 cents.

"You can see the improvement," Haeger said. "We could see that come down even more over time."

The bottom line

In the end, the cost evaluation gets a utility or a consumer only so far in figuring out what kind of kilowatts to buy, industry executives and analysts say.

"The first thing to do is figure out what energy policy you want," said CU's Komor. "Do you just want lowest rates? Do you want to reduce carbon emissions? Do you want long-term stable rates?

"And then use the analysis to figure out how to do it in a cost- effective way."

Mark Jaffe: 303-954-1912 or mjaffe@denverpost.com

Renewable-energy expenses

The problem with some types of renewable energy is that they are intermittent — the sun doesn't always shine and wind doesn't always blow.

These reliability limits add to the expense of solar and wind power.

There are two types of renewable energy with reliability, or capacity, factors of up to 90 percent — geothermal and hydropower. The U.S. Energy Information Administration puts the 2016 cost of geothermal at 10.2 cents a kilowatt-hour and hydro at 8.6 cents a kilowatt-hour — making them among the competitive forms of electricity generation.

Comments

Mark, your review of four levelized cost studies does a terrific job explaining why cost estimates can vary so greatly. As you rightly point out, part of the challenge is the “capacity factor.” Currently, transmission operators estimate line temperatures based on an IEEE formula to gauge capacity and congestion. But what if transmission lines have more capacity than we think? That would mean utilities are delivering far less electricity than can safely be transmitted. As CEO of a risk management firm, I work with new thermal imaging technology that can accurately measure the temperature of transmission lines. This technology, which is based on empirical mathematics and was recently confirmed by EPRI, can significantly reduce distribution capacity constraints and transmission congestion. Whatever the right balance between bringing down costs and increasing our reliance on renewables, the grid requires sufficient capacity. Today we have the technology that can help us meet both these goals. - Adam Rousselle, CEO, URMC

Coal helps keep electricity affordable. Four of five states with the lowest retail electricity costs use coal to generate 80 percent or more of their electricity.
Coal is also a necessity. We cannot meet the growing demand for energy worldwide without a mix of energy sources, including coal. That’s why investing in clean coal technologies is so important.
Thanks, in large part, to clean coal technology, major air pollutants from coal-fueled power plants are more than 80 percent lower (per kilowatt hour of electricity generated) than 30 years ago.
That’s why coal is—and will remain for decades to come—Americas’ fuel.
-Lisa Miller, American Coalition for Clean Coal Electricity
ACCCE